Mark Harrywitz proposes to invest in two shares, X and Y. He expects a return of 12%

from X and 8% from Y. The standard deviation of returns is 8% for X and 5% for Y. The correlation coefficient between the returns is .2.

a. Compute the expected return and standard deviation of the following portfolios:

Portfolio Percentage in X Percentage in Y 1 50 50 2 25 75 3 75 25

b. Sketch the set of portfolios composed of X and Y.

c. Suppose that Mr. Harrywitz can also borrow or lend at an interest rate of 5%. Show on your sketch how this alters his opportunities. Given that he can borrow or lend, what proportions of the common stock portfolio should be invested in X and Y?

AppendixLO1